MGT 3062 Project Instructions Spring 2014 The purpose of this project is to: · Analyze a capital budgeting decision using financial analysis tools, including free cash flow analysis, NPV, IRR, Profitability Index, payback period, and MIRR. · Learn Excel functions and techniques useful for project analysis, · Use Excel spreadsheets to perform sensitivity and scenario analysis, Learn how to communicate a project recommendation in a clear, logical, and professional manner General Instructions: · This is a group project. You may work together in groups of 2 to 4. · Projects with excessive spelling or grammar mistakes will be rejected. Turn in your analysis as follows: **failure to follow this format exactly will result in a substantial reduction in grade** Page 1: Title Page. Include your name, the date, and the title of your project. Page 2: Executive Summary. This is a ONE PAGE brief description of the project and your recommendation. Paragraph 1: Describe the project. Paragraph 2: Discuss the risks and rewards involved. Paragraph 3: Make your recommendation. Include numbers to justify your recommendation. For example, “I recommend that the board reject this project because the expected NPV is negative five million dollars and the IRR is only 8%” You can add more paragraphs if it makes your write up clearer. Page 3 - X: Your analysis in words. Take as many pages as you need to justify your recommendation. This should be a very detailed and well reasoned analysis. Do not just attach spreadsheets. Explain the work that you have done. At a minimum, compute NPV, IRR, MIRR, PI, and payback period. Briefly discuss each metric that you use. For example, “I compute the profitability index because it shows how much value is created for every dollar invested. It is calculated by summing the discounted future cash flows…..” DOCUMENT ANY ASSUMPTIONS THAT YOU MAKE. Describe the sensitivity analysis. Why did you do it that way? Describe your scenarios. Why do you think this is the best or worst case? Under what conditions do best or worst cases materialize. Be creative. REMEMBER: The spreadsheets are NOT your analysis. You must explain what you did and why you did it. Refer to the spreadsheets in the write up ("as I show on Exhibit A.."). This section should be long enough to cover the topic, but short enough to be interesting. Think like an attorney and build your case. When you have completed your analysis, estimate an expected NPV of the project. Page X+1, X+2, and beyond: A copy of your spreadsheets. This is an Excel project. All values must be calculated in the spreadsheet. Your calculator should not be used at all (except perhaps to verify your Excel formulas). A change in any one input must result in a change in the NPV, IRR, MIRR, etc. Do your WACC calculations on a separate worksheet, but have the main worksheet pull the RACC (required rate of return) from the WACC worksheet. Show the base ...

1. MGT 3062 Project Instructions Spring 2014
The purpose of this project is to:
· Analyze a capital budgeting decision using financial analysis
tools, including free cash flow analysis, NPV, IRR, Profitability
Index, payback period, and MIRR.
· Learn Excel functions and techniques useful for project
analysis,
· Use Excel spreadsheets to perform sensitivity and scenario
analysis,
Learn how to communicate a project recommendation in a clear,
logical, and professional manner
General Instructions:
· This is a group project. You may work together in groups of 2
to 4.
· Projects with excessive spelling or grammar mistakes will be
rejected.
Turn in your analysis as follows:
**failure to follow this format exactly will result in a
substantial reduction in grade**
Page 1: Title Page.
Include your name, the date, and the title of your project.
Page 2: Executive Summary.

2. This is a ONE PAGE brief description of the project and your
recommendation.
Paragraph 1: Describe the project.
Paragraph 2: Discuss the risks and rewards involved.
Paragraph 3: Make your recommendation. Include numbers to
justify your recommendation. For example, “I recommend that
the board reject this project because the expected NPV is
negative five million dollars and the IRR is only 8%”
You can add more paragraphs if it makes your write up clearer.
Page 3 - X: Your analysis in words.
Take as many pages as you need to justify your
recommendation. This should be a very detailed and well
reasoned analysis. Do not just attach spreadsheets. Explain the
work that you have done. At a minimum, compute NPV, IRR,
MIRR, PI, and payback period. Briefly discuss each metric that
you use. For example, “I compute the profitability index
because it shows how much value is created for every dollar
invested. It is calculated by summing the discounted future
cash flows…..”
DOCUMENT ANY ASSUMPTIONS THAT YOU MAKE.
Describe the sensitivity analysis. Why did you do it that way?
Describe your scenarios. Why do you think this is the best or
worst case? Under what conditions do best or worst cases
materialize. Be creative.
REMEMBER: The spreadsheets are NOT your analysis. You
must explain what you did and why you did it. Refer to the
spreadsheets in the write up ("as I show on Exhibit A..").
This section should be long enough to cover the topic, but short

3. enough to be interesting. Think like an attorney and build your
case.
When you have completed your analysis, estimate an expected
NPV of the project.
Page X+1, X+2, and beyond: A copy of your spreadsheets.
This is an Excel project. All values must be calculated in the
spreadsheet. Your calculator should not be used at all (except
perhaps to verify your Excel formulas). A change in any one
input must result in a change in the NPV, IRR, MIRR, etc. Do
your WACC calculations on a separate worksheet, but have the
main worksheet pull the RACC (required rate of return) from
the WACC worksheet.
Show the base scenario, and other scenarios of interest. Other
scenarios of interest may be the "worst case" or the "best case."
You may also like to present cases where NPV is zero because
one variable changed (sensitivity analysis). Use your own
judgment. Your job is to build a case to justify your
recommendation. Suggestion: save interesting scenarios on
separate worksheets so that you can easily refer to them while
writing your analysis.
Reduce spreadsheets to ONE PAGE landscape view. The
command sequence is: File, Page Preview, Setup, and “Adjust to
fit 1 page".
Last Pages:
Include a printout of your formulas. Excel formulas can be
viewed by pressing "ctrl ~" (that is two keys held together).
Reduce the formula view to ONE PAGE landscape before
printing. I understand that this results in very small print.
The Scenario
Your company is considering spending $550 million to purchase
and install equipment to build state-of-the-art rophemeric

4. induction spheres. These personal protection devices have been
used successfully by soldiers on the battlefield for over a
decade. However, recent technological advances (coupled with
unfortunate intelligence breeches) have rendered the devices
useless for battlefield operations. The top-secret technology
has been declassified.
Firms are rushing to bring commercial applications to the
market. Our company is the first to develop a commercially
viable consumer product. Two pieces of equipment are needed
to go into full production: $380 million dollar rophemerization
chamber and a $170 million dollar industrial sphereinator. The
two pieces of equipment must be depreciated using 10 year and
15 year MACRS, respectively. Assume that the equipment will
be put in service within the first six months of the project. This
assumption allows you to use the MARCS table in the Ross
Westerfield and Jordan textbook. The MARCS table is also
found here: http://en.wikipedia.org/wiki/MACRS
Assume that you continually update or replace equipment and
spend capital equal to that year’s total depreciation.
Your initial price point is $1,550 and your first year’s projected
sales volume is 80,000 units. You expect the law enforcement
market to be strong.
Initial fixed costs are $800,000 and each system costs $675 in
parts and labor. Subsequent year's projections are shown on the
next page. After the 8th year assume that the demand for the
product will persist and free cash flows of the project will grow
at 3.5% annually.
Your marginal tax rate is 30%. Assume that this is one of many
projects for the company. No special tax treatments are
required for years of negative earnings.
An initial net working capital investment of $6,000,000 is
required.

5. You will need to upgrade your equipment in 5 years when the
competition has "leap-frogged" your unit. At the end of year
four, you will invest an additional $11 million in 5 year
MACRS equipment and you will invest an additional net
working capital of $1 million into the project. The equipment
purchased at this time will be installed by the middle of year
five (use standard MACRS tables with year 5 being the first
depreciation year) and it will have a salvage value of about a
third of its original value at the end of the project.
Is this project worth doing? The market risk premium is 6% and
the risk free rate is 3.5%. The project requires a risk premium
(over the firm's WACC) of 8% for management approval.
What is your decision: deal or no deal?
Different stakeholders may be interested in different numbers,
so at a minimum, justify your decision by calculating the
payback period, the NPV, the IRR, the MIRR, and the
Profitability Index.
To further justify your decision, conduct scenario and
sensitivity analysis. Use your own best judgment to estimate
the project’s sensitivity to the company’s projected sales and
costs. How accurate do the estimates have to be for the project
to remain profitable? What input value or combinations of
input values drives NPV to zero? What is the best case
scenario? What causes this best case? What is the worst case
scenario? What causes the worst case?
Forecasted Price, Sales, and Costs
Unit Price
Unit Sales
Variable Cost
Fixed Costs
Year 1
1,550
80,000

6. 675
800,000
Year 2
1,473
160,000
662
816,000
Year 3
1,399
240,000
649
832,320
Year 4
1,329
250,000
636
848,966
Year 5
1,263
300,000
623
865,945
Year 6
1,200
320,000
611
883,264
Year 7
1,140
360,000
599
900,929
Year 8
1,083
390,000
587

7. 918,948
The company has spent a lot of time and effort developing these
forecasts.
Your sensitivity and scenario analysis and recommendations
should treat these numbers with due respect.
As in any forecast, the company has more confidence in the
nearer term numbers.
Estimating Weighted Average Cost of Capital (WACC)
Log on to a Bloomberg Terminal. You may have to create a
user id. Choose a fortune 500 company that has at least one
bond. Do not choose a debt free company. Use Bloomberg to
discover your firm’s WACC. Here is a link that may be helpful:
researchguides.dartmouth.edu/content.php?pid=382082&sid=31
31277
Here is a list of Fortune 500 companies:
http://money.cnn.com/magazines/fortune/fortune500/2013/full_l
ist/index.html?iid=F500_sp_full
In your write up, describe in great detail the components of
WACC and how it was calculated.
Assume that you are analyzing this project for your chosen
company and make your decision (Deal or No Deal)
accordingly.
SCHELLER BUSINESS SCHOOL AT GEORGIA TECH
Barry Marchman Ph.D. Room 423 (404) 894-5110
Base CaseBASE CASE SCENARIO - OUR "MOST LIKELY"

8. PROJECTIONSTrend Assumptions (% change per year)Unit
PriceUnit SalesVariable CostFixed CostsYear 0Year 1Year
2Year 3Year 4Year 5Year 6Year 7Year 8Unit PriceUnit
SalesVariable CostFixed CostsINCOME STATEMENTSales
ReveuneFixed CostVariable CostOp
profitsDepreciationEBITTAXNet IncomeSTATEMENT OF
CASH FLOWSOCF- 0- 0- 0- 0- 0- 0- 0- 0CAPITALNWCTotal
Cash FlowsTax RateSensitivity AnalysisMargin of ErrorKs
(Req. Return)Unit PriceIRRUnit SalesNPV(Ks)Variable
CostMIRRFixed CostsDEPRECIATION & BOOK VALUE
DATAATSVCAP1CAP2CAP35 Year MACRS7 Year MACRS10
Year MACRSDEPR 1DEPR 2DEPR 3Book Value 1BV1Book
Value 2BV2Book Value 3BV3Salvage Value 1Salvage Value
2Salvage Value 3
&Z&F
Initial Assumption is that NWC changes in year 0 and is
recouped in terminal year. Some projects require additional
infusions of working capital.
Worst CaseWORST CASE SCENARIO - PESSIMISTIC
PROJECTIONSYear 0Year 1Year 2Year 3Year 4Year 5Year
6Year 7Year 8Unit PriceUnit SalesVariable CostFixed
CostsINCOME STATEMENTSales ReveuneFixed CostVariable
CostOp profitsDepreciationEBITTAXNet IncomeSTATEMENT
OF CASH FLOWSOCFCAPITALNWCTotal Cash FlowsTax
RateKsIRRNPV(Ks)MIRRDEPRECIATION & BOOK VALUE
DATAATSVCAP1CAP2CAP35 Year MACRS7 Year MACRS10
Year MACRSDEPR 1DEPR 2DEPR 3Book Value 1Book Value
2Book Value 3Salvage Value 1Salvage Value 2Salvage Value 3
&Z&F
Initial Assumption is that NWC changes in year 0 and is
recouped in terminal year. Some projects require additional
infusions of working capital.
NOTICE THAT IF PROJECTIONS ARE JUST A LITTLE BIT
WRONG, THE PROJECT IS REJECTED.
THIS PROJECT IS VERY SENSITVE TO PROJECTION

9. ERRORS.
Best CaseBEST CASE SCENARIO - OPTIMISTIC
PROJECTIONSYear 0Year 1Year 2Year 3Year 4Year 5Year
6Year 7Year 8Unit PriceUnit SalesVariable CostFixed
CostsINCOME STATEMENTSales ReveuneFixed CostVariable
CostOp profitsDepreciationEBITTAXNet IncomeSTATEMENT
OF CASH FLOWSOCFCAPITALNWCTotal Cash FlowsTax
RateKsIRRNPV(Ks)MIRRDEPRECIATION & BOOK VALUE
DATAATSVCAP1CAP2CAP35 Year MACRS7 Year MACRS10
Year MACRSDEPR 1DEPR 2DEPR 3Book Value 1Book Value
2Book Value 3Salvage Value 1Salvage Value 2Salvage Value 3
&Z&F
Initial Assumption is that NWC changes in year 0 and is
recouped in terminal year. Some projects require additional
infusions of working capital.